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ch1

Student: ___________________________________________________________________________

1. Both real and financial assets have four principal attributes that are significant factors in the investment
decision process. These are:
I. liquidity
II. capital gain
III. risk
IV. return or yield
V. time pattern of future cash flows
VI. price and cash flow volatility
A. I, II, III, IV
B. I, III, IV, V
C. I, III, IV, VI
D. II, III, IV, V
2. The exchange of goods and services is made more efficient by:
A. barter
B. money
C. governments
D. some combination of government transfer and barter
3. A nation state that has only a barter system has high transaction costs because:
A. the difficulties of trade result in high legal costs because of the contracts required
B. traders must spend quite a bit of time looking for trading partners
C. taxes under this system consume a large amount of output
D. the difficulties of trade require high insurance premiums
4. The term medium of exchange' for money refers to its use as:
A. coinage
B. currency
C. anything that is widely accepted as payment for goods and services
D. any standard of value that prices can be expressed in
5. The role of money as a store of value refers to:
A. the value of money falling only when the money supply falls
B. the value of money falling only when the money supply increases
C. the fact that money allows worth to be stored readily
D. the fact that money never loses its value compared with other assets
6. Money increases economic growth by assisting transfers from:
A. consumers to investors
B. savers to borrowers
C. businesses to consumers
D. borrowers to investors
7. Financial markets have developed to facilitate the exchange of money between savers and borrowers.
Which of the following is NOT a function of money?
A. A store of value
B. A medium of exchange for settling economic transactions
C. A claim to future cash flows
D. Short-term protection against inflation
8. Buyers of financial claims lend their excess funds as they:
A. expect to borrow extra funds in the future
B. want surplus funds in the future
C. want to invest in the future
D. want to increase their costs relative to their incomes
9. Sellers of financial claims promise to pay back borrowed funds:
A. by borrowing extra funds in the future
B. based on their expectation of having surplus funds in the future
C. by selling other assets
D. by reducing their costs relative to their incomes
10. A savings-surplus unit is an entity:
A. that needs to borrow funds from a surplus unit
B. whose income exceeds its spending
C. whose spending exceeds its income
D. called a company
11. The process of facilitating the flow of funds between borrowers and lenders performed by the financial
system:
A. is hindered by the problem of double coincidence of wants'
B. greatly reduces the probability of inflation
C. increases the rate of economic growth of a country
D. occurs only through financial intermediaries
12. Which of the following is NOT associated with characteristics of shares?
A. Part ownership of a company
B. Capital gains
C. A fixed interest payment
D. Dividends
13. A financial institution that obtains most of its funds from deposits is a/an:
A. investment bank
B. unit trust
C. commercial bank
D. general insurer
14. Institutions that specialise in off-balance-sheet advisory services are called:
A. depository financial institutions
B. contractual institutions
C. finance companies
D. investment banks
15. A financial intermediary that receives premium payments that are used to purchase assets to cover future
possible payments is a:
A. building society
B. credit union
C. savings bank
D. D: life insurance office
16. Financial institutions, whose liabilities specify that, in return for the payment of periodic funds to the
institution, the institution will make payments in the future, if and when a specified event occurs, are:
A. money market corporations
B. unit trusts
C. contractual savings institutions
D. depository financial institutions
17. Financial institutions that raise the majority of their funds by selling securities in the money markets
are:
A. commercial banks
B. building societies
C. finance companies
D. life insurance offices
18. Which of the following is NOT a term associated with shares?
A. Residual
B. Ownership
C. Voting rights
D. Contractual claim
19. Which of the following is NOT a characteristic commonly associated with preference shares?
A. A specified, fixed return
B. No voting rights
C. Higher ranking than bond holders on claims on assets
D. No entitlement to take possession of assets if the borrower defaults on payment
20. Long-term debt financing instruments used by companies are called:
A. bills
B. debentures
C. shares
D. equities
21. Which of the following is NOT associated with features of debt instruments?
A. A contractual claim against the borrower
B. Periodic interest payments
C. Higher claim on assets of borrower than equity holders
D. Their prices do not fluctuate as much as shares
22. Which of the following is NOT a feature of futures contracts?
A. They involve an obligation to buy or sell a specified amount.
B. Trading of contracts occurs on an exchange.
C. The contract price is settled at the end of the contract.
D. Trading an opposite contract usually closes out the contract.
23. Which of the following is NOT a feature of forward contracts?
A. They are not standardised.
B. They do not trade on organised exchanges.
C. The contract price may be settled at the end of the contract.
D. They are closed out by trading an opposite contract.
24. Which of the following is NOT a feature of option contracts?
A. When the buyer does not have an obligation to proceed with the contract.
B. When the writer of the contract receives a fee.
C. When the price of the designated asset is determined at the beginning of the contract.
D. When the right to buy is called a put option.
25. Which of the following is NOT a feature of swaps?
A. When there is a contractual arrangement to exchange cash flows.
B. When interest rate swaps exchange principal at the beginning and the end.
C. When a fixed rate obligation may be exchanged for a variable rate obligation.
D. When a swap can involve currencies as well.
26. The key reason for the existence of markets of financial assets is:
A. that holders of shares occasionally want to exchange them for bonds and other financial instruments
B. the high expenditure for many individuals and businesses
C. that the lack of money in an economy makes trade in financial assets necessary
D. the refusal of most modern governments to print money on demand
27. Financial markets:
A. facilitate the exchange of financial assets
B. provide information about prices of financial assets
C. provide a channel for funds to flow between the providers and users of funds
D. All of the given answers.
28. The most important function of a financial market is to:
A. provide information about shares
B. provide a market for shares
C. facilitate the flow of funds between lenders and borrowers
D. provide employment for brokers and agents
29. 29: Financial markets:
A. act as intermediaries by holding a collection of assets and issuing claims based on them to savers
B. issue claims on future cash flows of individual borrowers directly to lenders
C. transmit funds indirectly between lenders and borrowers
D. usually provide lenders with lower returns than other financial intermediaries
30. A primary financial market is one that:
A. offers financial assets with the highest expected return
B. offers the greatest number of financial assets
C. involves the sale of financial assets for the first time
D. offers financial assets with the highest historical return
31. Purchasing unsecured notes on the Australian Securities Exchange is an example of:
A. a primary market transaction
B. companies raising finance from another financial intermediary
C. companies raising new finance
D. a secondary market transaction
32. When a security is sold in the financial markets for the first time:
A. funds flow from the saver to the issuer
B. funds flow from the borrower to the saver
C. it represents a secondary transaction to the underwriter
D. it is an asset for the borrower
33. Which of the following is NOT an example of primary market transactions?
A. A company issue of shares to raise funds for an investment project.
B. A government issue of bonds.
C. A mortgage bond.
D. A mortgage loan to buy a house.
34. A primary market' is a market:
A. only for equity issues by major or primary' companies
B. where borrowers sell new financial instruments to buyers
C. where savers sell new financial claims to borrowers
D. where government securities are bought and sold
35. Buying bonds in the long-term debt market is an example of:
A. a secondary market transaction
B. a primary market transaction
C. companies raising new funds
D. companies raising funds from a secondary source
36. The market where existing securities are sold is the:
A. economic market
B. primary market
C. secondary market
D. financial market
37. When a large company issues a financial instrument in the financial markets:
A. funds flow indirectly from saver to borrower
B. the cost of funds is generally higher owing to the risk involved
C. it buys a financial claim
D. it sells a financial claim
E. Difficulty: Easy
38. Secondary markets:
A. allow borrowers to raise long-term funds
B. facilitate capital raising in the primary market
C. do not raise new funds but offer liquidity
D. All of the given answers.
39. The flow of funds through financial markets increases the volume of savings and investment by:
A. maintaining low interest rates
B. storing large quantities of cash
C. providing savers with a variety of ways to lend to borrowers
D. offering lower interest rates than could be obtained directly from borrowers
40. All of the following are features of financial markets EXCEPT:
A. They generally provide borrowers with lower cost funds than through a financial intermediary
B. Funds are channelled directly from savers to borrowers
C. Contractual agreements are issued between savers and borrowers
D. They generally deal only with the purchase and sale of government securities
41. Which of the following is NOT true of a well-functioning financial market?
A. Steadily increasing liquidity for most assets.
B. Increased ease of restructuring portfolios of assets.
C. Quick assimilation of information into asset prices.
D. A selection of financial assets with similar timings of cash flow to reduce risk.
42. Financial markets:
A. act as intermediaries between borrowers and savers
B. directly issue claims on savers to borrowers
C. involve the buying and selling of existing financial securities only
D. involve both primary and secondary transactions
43. Direct financing allows a borrower to:
A. easily assess a lender's level of default risk
B. match amounts and maturity of investments with borrowers
C. lower search and transaction costs
D. diversify their funding sources
44. Which of the following is NOT a possible disadvantage of direct financing?
A. Matching amounts of funds to be borrowed with those to be lent.
B. Assessment of the risk of the borrower.
C. Cost of preparing legal contracts, taxation and accounting advice.
D. Cost of the financial intermediary involved.
45. An issue of debentures is an example of:
A. a secondary market transaction
B. funding raising through financial intermediaries
C. a direct form of funding
D. an indirect form of funding
46. An example of an indirect form of funding is a/an:
A. issue of debentures
B. issue of unsecured notes
C. term loan
D. issue of shares
47. 47: Financial intermediaries:
A. act as a third party by holding a portfolio of assets and issuing claims based on them to savers
B. issue claims on future cash flows of individual borrowers directly to lenders
C. transmit funds directly between lenders and borrowers
D. usually provide lenders with lower returns than other financial institutions
48. The flow of funds between lenders and borrowers is channelled:
A. indirectly through financial markets
B. directly through financial intermediaries
C. indirectly through financial intermediaries
D. mainly through government agencies
49. Intermediaries, by managing the deposits they receive, are able to make long-term loans while satisfying
savers' preferences for liquid claims.' This statement is referring to which important attribute of financial
intermediation?
A. Asset transformation
B. Maturity transformation
C. Credit risk transformation
D. Denomination transformation
50. The main role of financial intermediaries is to:
A. borrow funds from surplus units and lend them to borrowers
B. provide advice to consumers on their finances
C. provide funds for the government to cover budget deficits
D. help ensure there are enough funds in circulation in a country
51. Financial intermediaries pool the funds of:
A. many small savers and make loans to a few large borrowers
B. a few savers and make loans to many borrowers
C. many small savers and make loans to many borrowers
D. a few large savers and make loans to a few large borrowers
52. Small savers prefer to use financial intermediaries rather than lending directly to borrowers because:
A. financial intermediaries offer the savers a wide portfolio of financial instruments
B. financial intermediaries offer much higher interest rates than can be obtained directly from borrowers
C. borrowers dislike dealing with savers
D. savers have a claim with the borrower by way of the financial intermediary
53. Financial intermediaries can engage in credit risk transformation as they:
A. obtain cost advantages owing to their size and business volumes transacted
B. can quickly convert financial assets into cash, close to the current market price
C. develop expertise in lending and diversifying loans
D. can pool savers' short-term deposits and make long-term loans
54. When a financial intermediary collects together deposits and lends them out as loans to companies, it is
engaging in:
A. liability management
B. liquidity management
C. credit transformation
D. asset transformation
55. 55: Liquidity' in financial terms is:
A. a feature of money only
B. the ease with which an asset can be sold at the published market price
C. the best measure of risk of a financial asset
D. to lower the rate of return for an asset
56. When an individual has immediate access to their funds from an account with a financial intermediary,
the intermediary is engaging in:
A. asset transformation
B. liability management
C. liquidity management
D. credit transformation
57. When a financial intermediary can repeatedly use standardised documents, it is engaging in:
A. liability management
B. liquidity management
C. credit transformation
D. economies of scale
58. According to the textbook, all of the following are financial intermediaries EXCEPT a/an:
A. bank
B. insurance company
C. superannuation fund
D. share broking firm
59. An example of a financial intermediary is:
A. a stockbroker
B. the Australian Securities Exchange
C. the Australian Securities Commission
D. an insurance company
60. The main participants in the financial system are individuals, corporations and governments. Individuals
are generally ______ of funds and corporations are net ________ of funds.
A. borrowers; suppliers
B. users; providers
C. suppliers; users
D. demanders; providers
61. Which of the following borrowers would pay the lowest interest rate on debt of equal maturity?
A. The National Bank of Australia
B. Telstra
C. The City of Sydney
D. The Commonwealth Government
62. Generally, in the long term, a government:
A. is a net borrower of funds
B. is a net supplier of funds
C. borrows funds directly from households
D. borrows funds directly from the financial market
63. The _______ is created by a financial connection between providers and users of short-term funds.
A. share market
B. capital market
C. money market
D. financial market
64. Which of the following are NOT usually short-term discount securities?
A. Negotiable certificates of deposit
B. Commercial paper
C. Bank bills
D. Unsecured notes
65. Which of the following is NOT a feature of the money market?
A. It is a mainly wholesale market.
B. It deals with short-term financial claims.
C. It is important in financing the working-capital needs of businesses and governments.
D. It only operates as a market in which new security issues are created and marketed.
66. The market that involves the buying and selling of short-term securities is the:
A. securities market
B. money market
C. share market
D. capital market
67. A large company with a temporary surplus of funds is most likely to buy:
A. bank bills
B. convertible notes
C. debentures
D. shares
68. A company that issues promissory notes into the short-term debt markets is said to be conducting a
transaction in the:
A. commercial paper market
B. inter-bank market
C. bills market
D. official short-term money market
69. The market that generally involves the buying and selling of discount securities is the:
A. securities market
B. money market
C. share market
D. capital market
70. A source of short-term liquidity funding for banks is the issue of:
A. bank bills
B. debentures
C. certificates of deposit
D. commercial paper
71. The market that includes individuals, companies and governments in the buying and selling of long-term
debt and equity securities is the:
A. currency market
B. debt market
C. capital market
D. financial market
72. For additional funding, a company decides to issue $15 million in debentures. The securities will be
issued into the:
A. retail markets
B. secondary markets
C. short-term money markets
D. capital markets
73. The major financial assets traded in the capital market are:
A. bank bills and commercial paper
B. Treasury notes and certificates of deposits
C. bonds and convertible securities
D. shares and bonds
74. Compared with Treasury bonds, Treasury notes generally:
A. have a longer maturity
B. pay interest annually
C. are issued in the capital markets
D. are discount securities
75. If you purchase an Australian government bond, that bond is:
A. an asset to you but a liability for the Australian government
B. an asset to you as well as an asset for the Australian government
C. a liability to you but an asset for the Australian government
D. a liability to you as well as a liability for the Australian government
76. When government borrowing reduces the amount of funds available for lending to businesses, this is
called:
A. credit rationing
B. crowding out
C. capital rationing
D. government quotas
77. All of the following are key financial services provided by the financial system EXCEPT:
A. liquidity
B. risk transfer
C. profitability
D. information
78. Which of the following would be most likely to use financial markets?
A. A household with a small amount saved.
B. A small business wanting to borrow to buy some machinery.
C. A government authority wanting to borrow to finance highway construction.
D. A company with a poor credit rating.
79. The flow of funds between the four sectors of a domestic economy and the rest of the world is called:
A. flow of funds
B. sector analysis
C. sectorial flows
D. cross-sector flows
80. Money allows economic and financial transactions to be carried out more efficiently than bartering.
True False
81. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows.
True False
82. Deficit entities purchase financial instruments that offer the lowest interest rate.
True False
83. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse individuals will
accept a lower rate of return so as to reduce their risk exposure.
True False
84. A well-functioning financial system enables participants to readily change the composition of their
financial assets portfolio.
True False
85. Monetary policy relates to actions of a central bank to control the amount of money for transactions in an
economy.
True False
86. The government organisation responsible for the conduct of monetary policy is the prudential supervisor
of a country's banks.
True False
87. Investment banks are contractual organisations that make up contracts for their corporate clients and
governments.
True False
88. In recent years, depository financial institutions have obtained a large proportion of their funds from the
financial markets directly.
True False
89. A stock is a debt security that promises to make specified interest payments.
True False
90. Explain how the properties of money facilitated the evolution of a modern financial system.

91. What is monetary policy and who is responsible for its implementation?

92. Explain what a debt security is. What are some common types of debt securities?
93. Identify and explain briefly the types of derivatives in a financial system.

94. The capital markets provide the opportunity for large corporations to manage their long-term cash flows.
Discuss this statement using the example of a surplus entity and a deficit entity.
ch1 Key
1. Both real and financial assets have four principal attributes that are significant factors in the
investment decision process. These are:
I. liquidity
II. capital gain
III. risk
IV. return or yield
V. time pattern of future cash flows
VI. price and cash flow volatility
A. I, II, III, IV
B. I, III, IV, V
C. I, III, IV, VI
D. II, III, IV, V
Difficulty: Medium
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2. The exchange of goods and services is made more efficient by:
A. barter
B. money
C. governments
D. some combination of government transfer and barter
Difficulty: Easy
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3. A nation state that has only a barter system has high transaction costs because:
A. the difficulties of trade result in high legal costs because of the contracts required
B. traders must spend quite a bit of time looking for trading partners
C. taxes under this system consume a large amount of output
D. the difficulties of trade require high insurance premiums
Difficulty: Medium
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4. The term medium of exchange' for money refers to its use as:
A. coinage
B. currency
C. anything that is widely accepted as payment for goods and services
D. any standard of value that prices can be expressed in
Difficulty: Easy
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5. The role of money as a store of value refers to:
A. the value of money falling only when the money supply falls
B. the value of money falling only when the money supply increases
C. the fact that money allows worth to be stored readily
D. the fact that money never loses its value compared with other assets
Difficulty: Medium
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6. Money increases economic growth by assisting transfers from:
A. consumers to investors
B. savers to borrowers
C. businesses to consumers
D. borrowers to investors
Difficulty: Medium
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7. Financial markets have developed to facilitate the exchange of money between savers and borrowers.
Which of the following is NOT a function of money?
A. A store of value
B. A medium of exchange for settling economic transactions
C. A claim to future cash flows
D. Short-term protection against inflation
Difficulty: Medium
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8. Buyers of financial claims lend their excess funds as they:
A. expect to borrow extra funds in the future
B. want surplus funds in the future
C. want to invest in the future
D. want to increase their costs relative to their incomes
Difficulty: Medium
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9. Sellers of financial claims promise to pay back borrowed funds:
A. by borrowing extra funds in the future
B. based on their expectation of having surplus funds in the future
C. by selling other assets
D. by reducing their costs relative to their incomes
Difficulty: Easy
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10. A savings-surplus unit is an entity:
A. that needs to borrow funds from a surplus unit
B. whose income exceeds its spending
C. whose spending exceeds its income
D. called a company
Difficulty: Easy
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11. The process of facilitating the flow of funds between borrowers and lenders performed by the
financial system:
A. is hindered by the problem of double coincidence of wants'
B. greatly reduces the probability of inflation
C. increases the rate of economic growth of a country
D. occurs only through financial intermediaries
Difficulty: Medium
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12. Which of the following is NOT associated with characteristics of shares?
A. Part ownership of a company
B. Capital gains
C. A fixed interest payment
D. Dividends
Difficulty: Easy
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13. A financial institution that obtains most of its funds from deposits is a/an:
A. investment bank
B. unit trust
C. commercial bank
D. general insurer
Difficulty: Easy
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14. Institutions that specialise in off-balance-sheet advisory services are called:
A. depository financial institutions
B. contractual institutions
C. finance companies
D. investment banks
Difficulty: Easy
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15. A financial intermediary that receives premium payments that are used to purchase assets to cover
future possible payments is a:
A. building society
B. credit union
C. savings bank
D. D: life insurance office
Difficulty: Easy
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16. Financial institutions, whose liabilities specify that, in return for the payment of periodic funds to
the institution, the institution will make payments in the future, if and when a specified event occurs,
are:
A. money market corporations
B. unit trusts
C. contractual savings institutions
D. depository financial institutions
Difficulty: Easy
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17. Financial institutions that raise the majority of their funds by selling securities in the money markets
are:
A. commercial banks
B. building societies
C. finance companies
D. life insurance offices
Difficulty: Easy
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18. Which of the following is NOT a term associated with shares?
A. Residual
B. Ownership
C. Voting rights
D. Contractual claim
Difficulty: Easy
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19. Which of the following is NOT a characteristic commonly associated with preference shares?
A. A specified, fixed return
B. No voting rights
C. Higher ranking than bond holders on claims on assets
D. No entitlement to take possession of assets if the borrower defaults on payment
Difficulty: Easy
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20. Long-term debt financing instruments used by companies are called:
A. bills
B. debentures
C. shares
D. equities
Difficulty: Easy
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21. Which of the following is NOT associated with features of debt instruments?
A. A contractual claim against the borrower
B. Periodic interest payments
C. Higher claim on assets of borrower than equity holders
D. Their prices do not fluctuate as much as shares
Difficulty: Medium
Viney - Chapter 01 #21
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22. Which of the following is NOT a feature of futures contracts?
A. They involve an obligation to buy or sell a specified amount.
B. Trading of contracts occurs on an exchange.
C. The contract price is settled at the end of the contract.
D. Trading an opposite contract usually closes out the contract.
Difficulty: Medium
Viney - Chapter 01 #22
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23. Which of the following is NOT a feature of forward contracts?
A. They are not standardised.
B. They do not trade on organised exchanges.
C. The contract price may be settled at the end of the contract.
D. They are closed out by trading an opposite contract.
Difficulty: Easy
Viney - Chapter 01 #23
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24. Which of the following is NOT a feature of option contracts?
A. When the buyer does not have an obligation to proceed with the contract.
B. When the writer of the contract receives a fee.
C. When the price of the designated asset is determined at the beginning of the contract.
D. When the right to buy is called a put option.
Difficulty: Medium
Viney - Chapter 01 #24
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25. Which of the following is NOT a feature of swaps?
A. When there is a contractual arrangement to exchange cash flows.
B. When interest rate swaps exchange principal at the beginning and the end.
C. When a fixed rate obligation may be exchanged for a variable rate obligation.
D. When a swap can involve currencies as well.
Difficulty: Medium
Viney - Chapter 01 #25
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26. The key reason for the existence of markets of financial assets is:
A. that holders of shares occasionally want to exchange them for bonds and other financial
instruments
B. the high expenditure for many individuals and businesses
C. that the lack of money in an economy makes trade in financial assets necessary
D. the refusal of most modern governments to print money on demand
Difficulty: Easy
Viney - Chapter 01 #26
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27. Financial markets:
A. facilitate the exchange of financial assets
B. provide information about prices of financial assets
C. provide a channel for funds to flow between the providers and users of funds
D. All of the given answers.
Difficulty: Easy
Viney - Chapter 01 #27
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28. The most important function of a financial market is to:
A. provide information about shares
B. provide a market for shares
C. facilitate the flow of funds between lenders and borrowers
D. provide employment for brokers and agents
Difficulty: Easy
Viney - Chapter 01 #28
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29. 29: Financial markets:
A. act as intermediaries by holding a collection of assets and issuing claims based on them to savers
B. issue claims on future cash flows of individual borrowers directly to lenders
C. transmit funds indirectly between lenders and borrowers
D. usually provide lenders with lower returns than other financial intermediaries
Difficulty: Hard
Viney - Chapter 01 #29
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30. A primary financial market is one that:
A. offers financial assets with the highest expected return
B. offers the greatest number of financial assets
C. involves the sale of financial assets for the first time
D. offers financial assets with the highest historical return
Difficulty: Easy
Viney - Chapter 01 #30
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31. Purchasing unsecured notes on the Australian Securities Exchange is an example of:
A. a primary market transaction
B. companies raising finance from another financial intermediary
C. companies raising new finance
D. a secondary market transaction
Difficulty: Easy
Viney - Chapter 01 #31
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32. When a security is sold in the financial markets for the first time:
A. funds flow from the saver to the issuer
B. funds flow from the borrower to the saver
C. it represents a secondary transaction to the underwriter
D. it is an asset for the borrower
Difficulty: Medium
Viney - Chapter 01 #32
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33. Which of the following is NOT an example of primary market transactions?
A. A company issue of shares to raise funds for an investment project.
B. A government issue of bonds.
C. A mortgage bond.
D. A mortgage loan to buy a house.
Difficulty: Medium
Viney - Chapter 01 #33
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34. A primary market' is a market:
A. only for equity issues by major or primary' companies
B. where borrowers sell new financial instruments to buyers
C. where savers sell new financial claims to borrowers
D. where government securities are bought and sold
Difficulty: Medium
Viney - Chapter 01 #34
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35. Buying bonds in the long-term debt market is an example of:
A. a secondary market transaction
B. a primary market transaction
C. companies raising new funds
D. companies raising funds from a secondary source
Difficulty: Easy
Viney - Chapter 01 #35
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36. The market where existing securities are sold is the:
A. economic market
B. primary market
C. secondary market
D. financial market
Difficulty: Easy
Viney - Chapter 01 #36
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37. When a large company issues a financial instrument in the financial markets:
A. funds flow indirectly from saver to borrower
B. the cost of funds is generally higher owing to the risk involved
C. it buys a financial claim
D. it sells a financial claim
E. Difficulty: Easy
Viney - Chapter 01 #37
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38. Secondary markets:
A. allow borrowers to raise long-term funds
B. facilitate capital raising in the primary market
C. do not raise new funds but offer liquidity
D. All of the given answers.
Difficulty: Medium
Viney - Chapter 01 #38
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39. The flow of funds through financial markets increases the volume of savings and investment by:
A. maintaining low interest rates
B. storing large quantities of cash
C. providing savers with a variety of ways to lend to borrowers
D. offering lower interest rates than could be obtained directly from borrowers
Difficulty: Medium
Viney - Chapter 01 #39
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40. All of the following are features of financial markets EXCEPT:
A. They generally provide borrowers with lower cost funds than through a financial intermediary
B. Funds are channelled directly from savers to borrowers
C. Contractual agreements are issued between savers and borrowers
D. They generally deal only with the purchase and sale of government securities
Difficulty: Medium
Viney - Chapter 01 #40
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41. Which of the following is NOT true of a well-functioning financial market?
A. Steadily increasing liquidity for most assets.
B. Increased ease of restructuring portfolios of assets.
C. Quick assimilation of information into asset prices.
D. A selection of financial assets with similar timings of cash flow to reduce risk.
Difficulty: Hard
Viney - Chapter 01 #41
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42. Financial markets:
A. act as intermediaries between borrowers and savers
B. directly issue claims on savers to borrowers
C. involve the buying and selling of existing financial securities only
D. involve both primary and secondary transactions
Difficulty: Easy
Viney - Chapter 01 #42
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43. Direct financing allows a borrower to:
A. easily assess a lender's level of default risk
B. match amounts and maturity of investments with borrowers
C. lower search and transaction costs
D. diversify their funding sources
Difficulty: Easy
Viney - Chapter 01 #43
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44. Which of the following is NOT a possible disadvantage of direct financing?
A. Matching amounts of funds to be borrowed with those to be lent.
B. Assessment of the risk of the borrower.
C. Cost of preparing legal contracts, taxation and accounting advice.
D. Cost of the financial intermediary involved.
Difficulty: Medium
Viney - Chapter 01 #44
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45. An issue of debentures is an example of:
A. a secondary market transaction
B. funding raising through financial intermediaries
C. a direct form of funding
D. an indirect form of funding
Difficulty: Medium
Viney - Chapter 01 #45
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46. An example of an indirect form of funding is a/an:
A. issue of debentures
B. issue of unsecured notes
C. term loan
D. issue of shares
Difficulty: Easy
Viney - Chapter 01 #46
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47. 47: Financial intermediaries:
A. act as a third party by holding a portfolio of assets and issuing claims based on them to savers
B. issue claims on future cash flows of individual borrowers directly to lenders
C. transmit funds directly between lenders and borrowers
D. usually provide lenders with lower returns than other financial institutions
Difficulty: Hard
Viney - Chapter 01 #47
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48. The flow of funds between lenders and borrowers is channelled:
A. indirectly through financial markets
B. directly through financial intermediaries
C. indirectly through financial intermediaries
D. mainly through government agencies
Difficulty: Easy
Viney - Chapter 01 #48
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49. Intermediaries, by managing the deposits they receive, are able to make long-term loans while
satisfying savers' preferences for liquid claims.' This statement is referring to which important
attribute of financial intermediation?
A. Asset transformation
B. Maturity transformation
C. Credit risk transformation
D. Denomination transformation
Difficulty: Medium
Viney - Chapter 01 #49
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50. The main role of financial intermediaries is to:
A. borrow funds from surplus units and lend them to borrowers
B. provide advice to consumers on their finances
C. provide funds for the government to cover budget deficits
D. help ensure there are enough funds in circulation in a country
Difficulty: Easy
Viney - Chapter 01 #50
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51. Financial intermediaries pool the funds of:
A. many small savers and make loans to a few large borrowers
B. a few savers and make loans to many borrowers
C. many small savers and make loans to many borrowers
D. a few large savers and make loans to a few large borrowers
Difficulty: Medium
Viney - Chapter 01 #51
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52. Small savers prefer to use financial intermediaries rather than lending directly to borrowers
because:
A. financial intermediaries offer the savers a wide portfolio of financial instruments
B. financial intermediaries offer much higher interest rates than can be obtained directly from
borrowers
C. borrowers dislike dealing with savers
D. savers have a claim with the borrower by way of the financial intermediary
Difficulty: Easy
Viney - Chapter 01 #52
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53. Financial intermediaries can engage in credit risk transformation as they:
A. obtain cost advantages owing to their size and business volumes transacted
B. can quickly convert financial assets into cash, close to the current market price
C. develop expertise in lending and diversifying loans
D. can pool savers' short-term deposits and make long-term loans
Difficulty: Hard
Viney - Chapter 01 #53
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54. When a financial intermediary collects together deposits and lends them out as loans to companies, it
is engaging in:
A. liability management
B. liquidity management
C. credit transformation
D. asset transformation
Difficulty: Easy
Viney - Chapter 01 #54
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55. 55: Liquidity' in financial terms is:
A. a feature of money only
B. the ease with which an asset can be sold at the published market price
C. the best measure of risk of a financial asset
D. to lower the rate of return for an asset
Difficulty: Easy
Viney - Chapter 01 #55
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56. When an individual has immediate access to their funds from an account with a financial
intermediary, the intermediary is engaging in:
A. asset transformation
B. liability management
C. liquidity management
D. credit transformation
Difficulty: Easy
Viney - Chapter 01 #56
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57. When a financial intermediary can repeatedly use standardised documents, it is engaging in:
A. liability management
B. liquidity management
C. credit transformation
D. economies of scale
Difficulty: Easy
Viney - Chapter 01 #57
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58. According to the textbook, all of the following are financial intermediaries EXCEPT a/an:
A. bank
B. insurance company
C. superannuation fund
D. share broking firm
Difficulty: Easy
Viney - Chapter 01 #58
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59. An example of a financial intermediary is:
A. a stockbroker
B. the Australian Securities Exchange
C. the Australian Securities Commission
D. an insurance company
Difficulty: Easy
Viney - Chapter 01 #59
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60. The main participants in the financial system are individuals, corporations and governments.
Individuals are generally ______ of funds and corporations are net ________ of funds.
A. borrowers; suppliers
B. users; providers
C. suppliers; users
D. demanders; providers
Difficulty: Easy
Viney - Chapter 01 #60
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61. Which of the following borrowers would pay the lowest interest rate on debt of equal maturity?
A. The National Bank of Australia
B. Telstra
C. The City of Sydney
D. The Commonwealth Government
Difficulty: Easy
Viney - Chapter 01 #61
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62. Generally, in the long term, a government:
A. is a net borrower of funds
B. is a net supplier of funds
C. borrows funds directly from households
D. borrows funds directly from the financial market
Difficulty: Easy
Viney - Chapter 01 #62
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63. The _______ is created by a financial connection between providers and users of short-term
funds.
A. share market
B. capital market
C. money market
D. financial market
Difficulty: Easy
Viney - Chapter 01 #63
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64. Which of the following are NOT usually short-term discount securities?
A. Negotiable certificates of deposit
B. Commercial paper
C. Bank bills
D. Unsecured notes
Difficulty: Medium
Viney - Chapter 01 #64
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65. Which of the following is NOT a feature of the money market?
A. It is a mainly wholesale market.
B. It deals with short-term financial claims.
C. It is important in financing the working-capital needs of businesses and governments.
D. It only operates as a market in which new security issues are created and marketed.
Difficulty: Medium
Viney - Chapter 01 #65
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66. The market that involves the buying and selling of short-term securities is the:
A. securities market
B. money market
C. share market
D. capital market
Difficulty: Easy
Viney - Chapter 01 #66
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67. A large company with a temporary surplus of funds is most likely to buy:
A. bank bills
B. convertible notes
C. debentures
D. shares
Difficulty: Easy
Viney - Chapter 01 #67
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68. A company that issues promissory notes into the short-term debt markets is said to be conducting a
transaction in the:
A. commercial paper market
B. inter-bank market
C. bills market
D. official short-term money market
Difficulty: Easy
Viney - Chapter 01 #68
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69. The market that generally involves the buying and selling of discount securities is the:
A. securities market
B. money market
C. share market
D. capital market
Difficulty: Easy
Viney - Chapter 01 #69
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70. A source of short-term liquidity funding for banks is the issue of:
A. bank bills
B. debentures
C. certificates of deposit
D. commercial paper
Difficulty: Medium
Viney - Chapter 01 #70
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71. The market that includes individuals, companies and governments in the buying and selling of long-
term debt and equity securities is the:
A. currency market
B. debt market
C. capital market
D. financial market
Difficulty: Easy
Viney - Chapter 01 #71
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72. For additional funding, a company decides to issue $15 million in debentures. The securities will be
issued into the:
A. retail markets
B. secondary markets
C. short-term money markets
D. capital markets
Difficulty: Medium
Viney - Chapter 01 #72
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73. The major financial assets traded in the capital market are:
A. bank bills and commercial paper
B. Treasury notes and certificates of deposits
C. bonds and convertible securities
D. shares and bonds
Difficulty: Easy
Viney - Chapter 01 #73
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74. Compared with Treasury bonds, Treasury notes generally:
A. have a longer maturity
B. pay interest annually
C. are issued in the capital markets
D. are discount securities
Difficulty: Medium
Viney - Chapter 01 #74
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75. If you purchase an Australian government bond, that bond is:
A. an asset to you but a liability for the Australian government
B. an asset to you as well as an asset for the Australian government
C. a liability to you but an asset for the Australian government
D. a liability to you as well as a liability for the Australian government
Difficulty: Hard
Viney - Chapter 01 #75
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76. When government borrowing reduces the amount of funds available for lending to businesses, this is
called:
A. credit rationing
B. crowding out
C. capital rationing
D. government quotas
Difficulty: Medium
Viney - Chapter 01 #76
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77. All of the following are key financial services provided by the financial system EXCEPT:
A. liquidity
B. risk transfer
C. profitability
D. information
Difficulty: Easy
Viney - Chapter 01 #77
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78. Which of the following would be most likely to use financial markets?
A. A household with a small amount saved.
B. A small business wanting to borrow to buy some machinery.
C. A government authority wanting to borrow to finance highway construction.
D. A company with a poor credit rating.
Difficulty: Easy
Viney - Chapter 01 #78
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79. The flow of funds between the four sectors of a domestic economy and the rest of the world is
called:
A. flow of funds
B. sector analysis
C. sectorial flows
D. cross-sector flows
Difficulty: Medium
Viney - Chapter 01 #79
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80. Money allows economic and financial transactions to be carried out more efficiently than
bartering.
TRUE

Bartering generally involves high search costs.

Difficulty: Easy
Viney - Chapter 01 #80
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81. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows.
FALSE

Instead of volatility it is liquidity.

Difficulty: Easy
Viney - Chapter 01 #81
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82. Deficit entities purchase financial instruments that offer the lowest interest rate.
FALSE

Deficit entities sell financial instruments.

Difficulty: Easy
Viney - Chapter 01 #82
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83. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse individuals will
accept a lower rate of return so as to reduce their risk exposure.
TRUE

An investor who prefers an investment with less risk to another with more risk, provided they offer the
same expected return, is risk averse.

Difficulty: Easy
Viney - Chapter 01 #83
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84. A well-functioning financial system enables participants to readily change the composition of their
financial assets portfolio.
TRUE

With liquid markets and financial intermediaries investors are able to change their portfolios.

Difficulty: Easy
Viney - Chapter 01 #84
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85. Monetary policy relates to actions of a central bank to control the amount of money for transactions in
an economy.
FALSE

From the early days of banking it was recognised there needed to be control over the money supply. A
country's central bank was usually assigned this task.

Difficulty: Easy
Viney - Chapter 01 #85
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86. The government organisation responsible for the conduct of monetary policy is the prudential
supervisor of a country's banks.
FALSE

Generally, the task of monetary policy is assigned to a central bank.

Difficulty: Easy
Viney - Chapter 01 #86
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87. Investment banks are contractual organisations that make up contracts for their corporate clients and
governments.
FALSE

Investment banks generally focus on provision of advisory services for corporate and government
clients.

Difficulty: Easy
Viney - Chapter 01 #87
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88. In recent years, depository financial institutions have obtained a large proportion of their funds from
the financial markets directly.
FALSE

For the major financial intermediaries, the banks, the bulk of their funds are still obtained from
deposits.

Difficulty: Easy
Viney - Chapter 01 #88
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89. A stock is a debt security that promises to make specified interest payments.
FALSE

A stock is a share that promises to pay dividends.

Difficulty: Easy
Viney - Chapter 01 #89
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90. Explain how the properties of money facilitated the evolution of a modern financial system.

As a medium of exchange, money makes markets in goods and services more efficient. If goods
and services are exchanged only for other goods and services as in the case of barter, there are
considerable transaction costs. When transaction costs are low, individuals can find it easier to
specialise in the production of goods and services. This can lead to a more active and productive
economy. As a store of value, money makes it easier for individuals to save their surplus earnings. It
is also more readily divisible than physical goods so that it can be appropriately apportioned according
to the size of the transaction. So an efficient flow of funds between savers and users of funds is a part
of a modern financial system.

Viney - Chapter 01 #90


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91. What is monetary policy and who is responsible for its implementation?

Monetary policy is the use of interest rates to control inflation, usually in a specified range, and to
promote economic growth. Usually a central bank is responsible for the carrying out of monetary
policy.

Viney - Chapter 01 #91


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92. Explain what a debt security is. What are some common types of debt securities?

A debt security represents a contractual claim against the issuer of the instrument who has borrowed
the funds. The borrower agrees to abide by the terms of the contract such as meeting covenants. A
major part of the contract is the terms of payment to the lender. Corporations issue debt securities such
as debentures, term loans, commercial bills, promissory notes and unsecured notes.

Viney - Chapter 01 #92


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93. Identify and explain briefly the types of derivatives in a financial system.

There are four basic types of derivative contracts.


1. A futures contract is a contract to buy (or sell) a specified amount of a commodity or financial
instrument at a price determined today for delivery or payment at a future specified date.
2. A forward contract has features similar to a futures contract but is generally more flexible as it is
negotiated with a bank or investment bank.
3. An option gives the buyer the right but not the obligation to buy (or sell) a certain asset before or at
a specified date at a predetermined price.
4. A swap contract is an arrangement to exchange specified future cash flows. With an interest rate
swap, there is an exchange of future cash flows, say one based on a floating interest rate and the other
on a fixed interest rate on a notional principal.

Viney - Chapter 01 #93


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94. The capital markets provide the opportunity for large corporations to manage their long-term cash
flows. Discuss this statement using the example of a surplus entity and a deficit entity.

The debt part of capital markets consists of a range of instruments. Large creditworthy companies
seeking funds can issue long-term securities such as bonds or unsecured notes directly into capital
markets. Organisations such as superannuation funds or insurance companies with funds to invest can
buy these instruments for part of their portfolio.

Viney - Chapter 01 #94


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ch1 Summary
Category # of Questions
Difficulty: Easy 55
Difficulty: Hard 5
Difficulty: Medium 28
Viney - Chapter 01 94